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CARBON

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CO2 to rise above EUR 50/t on EC 2030 target – analysts

(Montel) A European Commission plan to cut emissions by at least 55% by 2030 should drive prices on the EU carbon market above EUR 50/t by the end of the decade, analysts said on Wednesday.

Commission president Ursula von der Leyen proposed increasing the EU’s target to 55%, from the present 40% cut on 1990 levels, in a state of the union address to the European Parliament this morning. 

The goal’s announcement has been widely anticipated by a market that has been buffeted this year by a slump in near-term demand and mounting expectations the commission will tighten policies to become carbon neutral by 2050.

The 55% target alone was enough to ensure carbon allowances average around EUR 31/t over the next decade, said analysis firm Refinitiv. 

That is around EUR 11/t more than the company’s present average forecast under prevailing conditions.

 

The rise would be more pronounced towards the end of the decade. Prices would almost double to EUR 51/t between 2026 and 2030 due to a need then for more costly industry abatements, Refinitiv said. 

“If backed by member states and the parliament, the new ambition would imply a much more rapid decarbonisation of the European economy, almost wiping out an already sharply declining fossil fuel share of European power generation,” said Refinitiv analyst Ingvild Sorhus.

Tighter cap

The commission’s proposed target would imply hastening the pace at which the ceiling on permissible emissions under the cap-and-trade scheme falls each year. This means the so-called linear reduction factor would need to rise beyond an annual 2.2% contraction.

A leaked policy paper ahead of von der Leyen’s speech even flagged a potential one-off reduction in the cap.  The paper assumed Europe was already in store for a 45% fall in emissions by the end of the decade with no further policy measures.  

Commodities consultancy Icis even saw carbon prices nearing triple digits by the end of the decade if the EU’s member states and parliament ultimately approve the 55% target.

A mix of “reduced auction volumes and limited fuel-switching potential in the power sector” would lead to “very strong prices” by 2030, said Icis analyst Sebastian Braun.

MSR factor

However, the trajectory would depend on whether the EU chose to extend or let lapse the present rate of supply curbs taking place under the market stability reserve (MSR), he said.

This mechanism was introduced last year to remove surplus allowances from circulation so as to tighten the market. It is presently curbing 24% of the estimated glut annually from auction supply.  

The withdrawal rate is supposed to fall to 12% from 2023, though some have proposed extending the present rate to stabilise the market.  

“With the current legislation, we expect EUA prices to significantly decrease after 2023, even EUR 5/t are possible,” said Braun. “One possibility would be not to drop the MSR but there are also others.”

If the MSR rules are allowed to lapse while the EU shoots for a 55% climate target and increases the linear reduction factor to 5.2%, then Icis saw carbon prices rising to EUR 42/t by 2023, falling back as low as EUR 18/t by 2025 and then rebounding to EUR 90/t by 2030.

Icis saw no such dip taking place if the steeper MSR withdrawal rate was retained.

EUAs were last seen trading broadly flat on the day at EUR 29.81/t. On Monday they climbed to within EUR 0.47 of their EUR 31/t record high in the wake of the leaked commission policy paper.

In March, the shock of coronavirus lockdowns sent prices plunging below EUR 15/t.